Are IPO down rounds to blame for dearth of VC tech IPOs?

March 24, 2015

The number of technology companies going public has dwindled to a trickle.

Tech IPO Flow

Tech IPO Flow

One potential contributing factor behind this trend is that private valuations have been exceeding those that the public markets would give to these companies. To test this, we ran some analysis using our valuations and public market data to see if we could find evidence of IPO haircuts (a drop in valuation at the IPO from the round prior to the IPO).

We were able to identify 68 U.S. VC-backed tech companies for which we have valuation data in the round directly before their IPO (46% of the total)—this is our analysis data set. We found that 14 of these companies (20%) took haircuts in their IPO. There were four haircut IPOs in each of 2013 and 2014, representing 29% and 25% of each year’s total tech IPOs, respectively.

This has jumped recently, though, with three of the six tech public offerings in the last six months being haircut IPOs (Box, Hortonworks, New Relic). Given that normally around 20% of companies take haircuts and that this has been increasing lately, it isn’t the biggest jump in logic to presume that a number of companies soft marketing an IPO recently were getting similar haircut vibes. This provides some credence to the theory that a difference in pricing between public and private markets could be limiting the number of tech IPOs.

Tech Company IPO Step-up

It should be noted that many of the recent haircut IPO companies have since traded above or close to their pre-IPO valuations, and the last tech IPO (MaxPoint Interactive) saw an 8.5x step-up multiple from its prior valuation to IPO valuation.

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